The guidelines aim to transform China’s approach to ESG by introducing sustainability disclosure rules for large listed companies.

By Hui Xu, Paul A. Davies, Jean-Philippe Brisson, and Qingyi Pan

On February 8, 2024, under the auspices of the China Securities Regulatory Commission (CSRC), each of China’s three major stock markets — Shanghai Stock Exchange, Shenzhen Stock Exchange, and Beijing Stock Exchange— unveiled draft guidelines on sustainable development reports (SDRs) (collectively referred to as the Guidelines). The Guidelines require the largest Chinese public companies to publish high-quality and standardized SDRs, and are open for public comment until February 29, 2024.

Regulated Entities

Under the Guidelines, the top 180 companies listed on the Shanghai Stock Exchange and the top 50 companies on its Science and Technology Innovation Board of the Shanghai Stock Exchange must publish SDRs annually, within four months of the end of their fiscal year. Similarly, the Shenzhen Stock Exchange requires the top 100 listed companies and the top 100 companies on its high-tech board, ChiNext, to publish SDRs. Besides, both the Shanghai and Shenzhen Stock Exchange also stipulate that any company listed on both domestic and overseas markets (including Hong Kong) must also release such reports. SDRs are not mandatory for other listed companies on the Shanghai and Shenzhen Stock Exchanges, but these other companies are encouraged to voluntarily adhere to the disclosure rules. The Beijing Stock Exchange, which focuses on high-tech companies and emerging markets, does not impose any mandatory requirements and allows its listed companies to choose whether or not to follow such rules voluntarily.

All in-scope entities’ (Regulated Entities) SDR shall be published concurrently with the annual report, upon the approval of the board of directors.

Disclosure Contents

The Guidelines provide that Regulated Entities shall take a “double materiality” approach in identifying disclosure topics. This involves assessing both the impact of their activities on the environment and the risks and impact environmental factors may have on their business. Regulated Entities shall focus on “governance,” “strategy,” “impact, risk and opportunity management,” and “indicators and objectives” throughout their analysis and reporting processes. The Regulated Entities shall build up internal governance system, identify and assess risks and opportunities, evaluate the climate resilience, and disclose relevant information.

Under the Guidelines, Regulated Entities will be obligated to report on a broad range of environmental, social, and governance (ESG) factors, including climate change, waste management and ecosystems, energy consumption and circular economy, rural revitalization and social contribution, innovation and supply chain security, employment, governance mechanism, anti-bribery, and anti-unfair competition.

In response to climate change, the Guidelines mandate the disclosure of Scope 1 and Scope 2 greenhouse gas (GHG) emissions, while the reporting of Scope 3 GHG emissions remains voluntary. Regulated Entities using carbon credits to offset their GHG emissions must report the source and quantity of such carbon credits. Additionally, Regulated Entities are required to disclose their carbon reduction measures, goals, and achievements. If Regulated Entity generates any carbon credits from its carbon reduction measure, it must also disclose the creation and trade of such carbon credits. The Guidelines encourage but do not require Regulated Entities to involve third-party verification institutions to audit the data.

As for waste management and ecosystems, Regulated Entities shall disclose the contingency plan for major environmental incidents, and the specific circumstances and administrative penalties, if any. Regulated Entities that are under requirements to disclose environmental information shall disclose the emissions information, technologies and methods of pollutants treatment, emissions target and measures, and administrative penalties. Regulated Entities whose waste causes significant impact on the environment shall disclose the emissions target and measures, the total amount and density of the hazardous/non-hazardous waste, methods and status of hazardous waste treatment. Regulated Entities that have significant impact on the ecosystems and biodiversity shall disclose the withdrawal of business activities within ecological protection redlines,[1] and protection and restoration measures and effects.

Timeline for Implementation

The Guidelines are set to apply to the fiscal year of 2025, meaning that Regulated Entities must publish SDRs by April 30, 2026. As for transitional provisions, Regulated Entities are permitted to provide qualitative descriptions for indicators that are difficult to quantify in the first reporting period (for fiscal year of 2025), except for those that have been qualitatively reported before. During the first two reporting periods (for fiscal years of 2025 and 2026), Regulated Entities may provide only qualitative disclosure of the financial impacts of sustainability-related risks and opportunities if quantitative assessment is too challenging.

The authors would like to thank Yuxuan Chen for her contribution to this blog post.

[1] Ecological protection redlines refer to ecologically sensitive areas which are subject to governmental protection and reservation according to the “Guiding Opinions on Coordinating the Delimitation and Implementation of Three Control Lines in Territorial Space Planning,” published by the State Council of China on November 1, 2019.